RF Industries, Ltd. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2024, the three months ended January 31, 2024. Comparatives are for the three months ended January 31, 2023. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
RF Industries manufactures and markets interconnect products and systems, including RF connectors, cable assemblies, custom cabling, and wireless infrastructure products. It reports two segments: RF Connector and Cable Assembly, and Custom Cabling Manufacturing and Assembly. In the quarter, those segments represented 65% and 35% of sales, respectively.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $13.458 million | $18.343 million |
| Gross profit / margin | $3.303 million / 24.5% | $5.086 million / 27.7% |
| Operating loss | $2.085 million | $1.169 million |
| Net loss | $1.362 million | $1.162 million |
| Diluted loss per share | $0.13 | $0.11 |
| Cash provided by operations | $0.840 million | $0.889 million |
| Capital expenditures | $0.143 million | $1.130 million |
Sales declined year over year. Management attributed the Custom Cabling decrease primarily to lower hybrid-fiber-cable sales to wireless customers, and the RF Connector decrease to distributor inventory levels, lower carrier capital spending, and fewer projects involving approved RF components. Segment pretax results were losses of $1.729 million for RF Connector and $0.261 million for Custom Cabling; in the prior-year quarter, RF Connector reported $0.115 million of income and Custom Cabling a $0.790 million loss.
Operating expenses declined to $5.388 million from $6.255 million, including lower engineering and selling and general expenses. Selling and general expense included a one-time $0.1 million charge for consulting and inventory appraisal. The income-tax benefit was $0.831 million versus $0.160 million; the filing gives differing effective tax-rate figures in its financial statements and MD&A (37.6% and 37.9% for 2024; 12.3% and 12.1% for 2023).
Cash, liquidity, and debt
At January 31, 2024, cash and cash equivalents were $4.488 million, down from $4.897 million at October 31, 2023. Working capital was $21.6 million, with a current ratio of approximately 2.9:1. Current assets were $32.905 million and current liabilities $11.323 million. Operating cash inflow was supported principally by collections of receivables and inventory reductions; cash declined by $0.409 million overall during the quarter.
At quarter-end, the company reported $12.556 million borrowed under its term loan and $0.500 million under its revolving facility. The balance sheet reported $10.117 million of term loan, net of debt issuance costs, as noncurrent, plus $2.424 million current; the revolving balance was $0.500 million. Operating lease liabilities totaled $20.372 million, including $1.338 million current.
The company amended its Bank of America loan terms amid weaker earnings, including reducing revolving availability and revising liquidity and payment requirements. On March 15, 2024, after quarter-end, it entered into new secured credit facilities with Eclipse Business Capital, borrowed $11.9 million, repaid the Bank of America obligations in full, and terminated the prior loan agreement. The new facilities have a stated maximum of $15 million for the revolving loan and $1 million for an additional line, subject to borrowing-base availability; the agreement includes an $8 million minimum outstanding balance, fees, covenants, and potential prepayment penalties.
Outlook, risks, and other matters
Management reported cost reductions and facility-consolidation plans intended to improve operating cash flow and liquidity, and said it would pursue further efficiencies and organic revenue and profit growth. It stated that cash was expected to be sufficient for anticipated needs, while also noting that continued use of the going-concern basis depends on future profitable operations, cash generation, and available funding. No numerical revenue or earnings guidance is provided. Backlog was $16.2 million at January 31, 2024, compared with $16.1 million at October 31, 2023; orders may be canceled and are difficult to forecast.
Key risks include continued operating losses and execution of cost measures, debt and covenant requirements, customer order volatility, inventory valuation, and realization of deferred tax assets. The company had no customer representing at least 10% of sales in the quarter, but two distributors each represented 10% of net receivables. Management stated there were no material changes to the risk factors in its latest Form 10-K, no material ordinary-course-exceeding legal proceeding, and no material changes in internal control over financial reporting. Disclosure controls were judged effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether sales and gross margins recover from the year-over-year decline, particularly in wireless-related demand and distributor orders.
- Performance against management’s cost-reduction and facility-consolidation plans and the path back to operating profitability.
- Availability, pricing, borrowing-base capacity, and covenant compliance under the EBC facilities, including the minimum-balance and additional-line terms.
- Whether backlog converts to revenue, given limited visibility and customers’ ability to cancel orders.
- The effective tax-rate discrepancy in the filing and the assumptions supporting deferred tax asset realization.
- Potential customer concentration in receivables and the collectability of balances from the two significant distributor customers.